Sue Moore, managing director of Warrington-based Party Crew, says franchising is a bit like doing up your house: “You think you know the cost before you start, but it keeps going up and up.”

Moore came up with the idea of setting up a children’s party business in 2004 as a way of working from home and spending more time with her own nippers than was possible in her former role as sales director for a Wirral manufacturing firm. She was, she says, always planning to franchise the business around the country, and began doing so in spring 2005. You might think that was a tad ambitious, until you discover she is a qualified accountant with a previous career as national franchise director for Thames Water.

Despite (or perhaps because of) her experience in the field, she employed a franchising consultant to help with composing her operations manual. To draw up the franchise agreement she used – and recommends anyone considering such a move follows suit – a lawyer who is a member of the British Franchise Association.

Although children’s parties might not be the most obvious business model to franchise, Moore has developed blueprints for a range of formats including “pirate”, “princess” and teddy bear-making themes, which franchisees are expected to run according to specific procedures. She acknowledges that she is still putting money behind the franchise operation: “It’s a very big investment – it will probably take three-to-four years to recoup.”

However, she is certain that allowing other people to operate the Party Crew format under licence is the best way to expand a business that was effectively started from her living room, and the business has already expanded to cover Liverpool, Manchester, Chester, the Wirral, Durham, Newcastle, Reigate and Harrogate.

For another professional-turned entrepreneur, Georgina Cox, the decision to franchise Moving Works, her estate agency business, was made on the back of enquiries from would-be franchisees. “We had only been going for six weeks when we were approached for the first time,” she says. “After six months we decided we should go ahead with a pilot.” Founded in 2000, the business has now expanded to 14 outlets around Lancashire, with another recently opened in Chester. According to Cox, the technical elements of drawing up contracts and franchise agreements were the easy bit (but she is a solicitor, although she actually engaged a specialist lawyer to put together the initial documentation).

“The difficult part is finding good franchisees,” she says. “Most of ours are very good but we have had some weak ones. It surprises me that they’ll remortgage to cover their setup costs but then not fully commit and try to change our processes.

“Nowadays we carry out psychometric testing and have developed a more rigorous interview process. We turned seven people down last year.” So far all her franchisees have been people who have approached her: “Our accountant thinks we should advertise for franchisees but the franchise consultant says we should just let people do their research and come to us.”

While some franchisors hold the hands of franchisees at every stage, Cox prefers to engage people with more of an entrepreneurial streak. “We want people who want to run their own business rather than just a franchise,” she says. “We help them look for premises, negotiate their lease, deal with solicitors and recruit staff at the beginning, if they want. But we decided we didn’t want to go down the route of arranging lots of bulk deals – although we do procure stationery centrally and have just set up a deal with Dell.”

Jonathan Fitchew founded graduate sales recruitment firm Pareto Law in Wilmslow a decade ago and has, since 2004, used franchising to expand the business beyond its own operations in Wilmslow and London. Unlike Cox, he does a lot for his franchisees – which both helps them out and gives Pareto Law greater leverage. The company gives franchisees 15 days’ initial training on various aspects of running a business. On an ongoing basis, meanwhile, it handles franchisees’ invoicing and credit control centrally.

So, Fitchew explains, in addition to having legal sanctions written into the franchise agreement to enable it to close down any “rogue” franchisees, “we can also quickly stop providing the support they need to keep doing business”.

An issue for most businesses that plan to franchise themselves is how to carve up territory. Make each area too large and your franchisee won’t be able to bring in all the potential business out there, but make it too small and they won’t be able to make a living. “We work on exclusive postcodes,” says Moving Works’s Cox. “Each territory takes in about 10,000 households. We also look at other factors such as natural boundaries and, quite crucially, local newspaper circulation – each office should only have to advertise in one paper.”

Cutting the country up into manageable chunks has also been an issue for Pareto Law. As a rule of thumb, Fitchew says, each franchisee’s territory needs 2,500 businesses with a turnover in excess of £1 million. In general this works on fairly straightforward regional lines but, he says, “In London you have to be careful – it’s so populous and there are so many businesses.

“We also sold the Scottish franchise recently. We wondered later if we should have split it in two, but we’ll have to stand by it now.” On the whole, though, he is pleased with the results of the strategy: “It has enabled us to take the business into regions we would not otherwise have been able to in the same timescale, and we enjoyed record turnover and profits this year.” In the year to February 2006 the company made a retained profit of £279,000 on turnover of £5.1 million. Two years previously those figures were £49,000 and £2.5 million respectively. “We now have five franchisees, bringing us to a total of seven offices,” he continues “I think up to a dozen branches could work in the UK – but we are also looking internationally.”

As with Party Crew and Moving Works, Pareto Law is a “people business” so stands or falls by the quality of its franchisees. Fitchew says that he has to be careful, and carry out all the necessary background checks. “We had a doctor once who came to us wanting to be a franchisee. He was very eloquent and well-educated, but it just didn’t feel right. It turned out he had been struck off by the BMA for some pretty unpleasant events at his surgery,” he recalls.

Selecting potential franchisees has not been such a chore for Vimto manufacturer Nichols, which recently decided to franchise its £9 million Cabana business that supplies soft drinks for pub dispensing machines. Nichols had, in the past, operated the business on a franchise basis, before bringing it in-house in recent years, so a number of the new franchisees were actually coming on board with Cabana for a second time. The operation is split up into 15 territories, with one in the South West left to fill. “Because it’s geographically controlled, we aren’t always on the lookout for new franchisees,” explains chairman John Nichols.

Most franchise operations involve the payment by the franchisee of an initial fee, followed either by a flat regular fee or percentage of sales. According to Pareto Law’s Fitchew the initial fee should be set no higher than is necessary to cover costs: “If all you want is the franchise fee you shouldn’t be bothering.” It’s the ongoing revenue that is important, Fitchew believes, and Nichols would tend to agree. Cabana franchisees do not actually pay any fees.

“Their initial investment is in the dispensing equipment, which they then lend to the pub or club,” says Nichols. “They don’t pay us a franchise fee – their ongoing investment with us is buying our syrup.” According to Nichols, this strategy will see headline turnover fall because the syrup that forms the base of its drinks has to be sold more cheaply to distributors than to licensees but, rather more importantly, he predicts that shifting equipment costs onto franchisees means the business will move into profit this year.

Although the impact of franchising on the bottom line has to be the main concern for any entrepreneur, Fitchew points out that adopting the strategy can hold pitfalls for anyone seeking investment or an exit. “The City doesn’t like franchising,” he explains. “Just look at the problems Dyno-Rod had with its flotation. VCs tend to be more comfortable with franchising but some still have reservations.”

Institutional investors stymieing companies that want to ensure their long-term success? Surely not.

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